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Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?

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Abstract

Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread?the yield of a corporate bond minus the yield of a Treasury bond of the same maturity?of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non?energy firms also rose even though many non?energy firms might be expected to benefit from lower energy?related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non?energy firms had to be sold to satisfy investors who withdrew from bond funds in response to falling energy prices.

Suggested Citation

  • Brandon Li & Asani Sarkar, 2016. "Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?," Liberty Street Economics 20161005, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87157
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    File URL: https://libertystreeteconomics.newyorkfed.org/2016/10/why-did-the-recent-oil-price-declines-affect-bond-prices-of-non-energy-companies.html
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    More about this item

    Keywords

    Credit Risk; Liquidity Spillovers; Oil Prices;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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    This paper has been announced in the following NEP Reports:

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